A file photo shows visitors to the Vietnam AutoExpo 2011 show in Hanoi last year. Industry insiders expect 2012 to be a difficult year for the auto sector

The recent hikes in car registration and license-plate fees have worsened things for the automobile market, which was already struggling due to the economic downturn.

Hanoi and Ho Chi Minh City increased the fees on January 1 in an effort to reduce the number of private vehicles and ease the traffic congestion clogging their roads.

In the capital, the registration fee for cars with fewer than 10 seats has been raised from 12 percent of the vehicle's value to a full 20 percent. Their license-plate fee was increased 10-fold to VND20 million (US$950). In HCMC, the registration fee has gone up from 10 percent to 15 percent though the license plate fee has been left unchanged.

Akito Tachibana, president of Toyota Vietnam and chairman of the Vietnam Automobile Manufacturers' Association, warning that the higher fees would have a negative impact on the auto market since it relies on Hanoi and HCMC, said Toyota would have to reconsider its production plans for this year.

The bustling crowds at auto showrooms in Hanoi at this time of the year just before Tet are gone.

Tran Quoc Khang, sales manager of the Hanoi-based Thang Long car dealership said: "The higher fees are a severe blow to sellers since 70 percent of the total car sales are in Hanoi and HCMC."

He said his company used to sell one or two cars a day until a few months ago, but has not sold even one this month.

The fee hikes have increased the cost of cars sharply, he said. "Thus, a fall in demand is inevitable."

Cao Binh Phuong, a Hanoi construction engineer, said: "The increased price of cars along with high loan interest rates has made my dream of buying a car more difficult."

Some used-car dealerships were hoping that the price hikes would see customers switch to second-hand cars, but the high inflation and economic slowdown have also hit that segment of the market.

"The situation has never been this bad," said a representative of a second-hand car dealership in Hanoi. "There have been months we could not sell any vehicles. Our income is not enough to even pay our rents and salaries."

Tachibana of Toyota Vietnam said auto manufacturers hope the government has a long-term strategy to develop the sector. They support the government's plan to boost the automobile sector, but it can only happen when there is a stable tax policy, he said.

Khang expects 2012 to be a difficult year for the auto sector since monetary policy is still tight and public spending will remain low due to inflationary pressures. Higher automobile prices would make people hesitate more before deciding to buy, he said.

Central bank governor Nguyen Van Binh told an economic conference Wednesday that commercial banks will continue to limit lending to non-production businesses. The central bank is aiming for an overall credit growth of between 15 percent and 17 percent this year.

In view of the difficulties for the car market, members of the Vietnam Automobile Manufacturers' Association are expected to cut output by 20 percent this year. Sales last year dropped 1 percent from 2010 to 110,938 cars, the association said.

Tachibana said carmakers should improve their competitiveness failing which they would have to shut down production and switch to importing cars.

An anticipated cut in auto import taxes is not expected to spur demand since car prices remain too high compared to the average income in Vietnam of around $1,200 a year.

The Association of Southeast Asian Nations, also known as ASEAN, which is the main beneficiary of the tariff cut, is not Vietnam's primary car supplier, Khang said.

He was referring to the impending cuts in import duties on cars and trucks under agreements signed among members of ASEAN and between the bloc and China and South Korea. The tariffs on most cars exported by ASEAN members will be cut to 70 percent this year, 60 percent in 2013, and 50 percent in 2014.

Vietnam is expected to have 28 cars per 1,000 population by 2015, 38 by 2020, and 88 by 2025, compared with the current 18, according to the Ministry of Industry and Trade.

Khuat Viet Hung of the University of Transport said in October that Hanoi had nearly 400,000 cars that used 55 percent of the road space and 65 percent of all parking space during peak hours.